Credit Cards

   

Fostering Financial Literacy for Youth  Workshop Series, Spring 2016  The Fostering Financial Literacy for Youth workshop series is designed to equip afterschool program staff  with the knowledge, tools and resources to teach their youth to become financially savvy and in control  of their financial futures.    The workshops in the 4‐part series include:   Budgeting and Saving, February 11, 2016  Presented by: Corey Ogilby & James Gurney, Futures and Options    Hidden Cost of College, March 22, 2016  Presented by: Doug Young, THE WISER CHOICE    Credit Cards, April 6, 2016  Presented by: Doug Young, THE WISER CHOICE    Financial Investing, April 20, 2016  Presented by: Hillary Webb, Belinda Roman, Hollis Wilkinson, NYU Opportunity Programs    Use of Materials  These materials are a part of the Fostering Financial Literacy for Youth Series provided by the  Partnership for After School Education. They serve as reference materials and can support your work  with youth around financial literacy.      Fostering Financial Literacy for youth is funded by Morgan Stanley.   

Fostering Financial Literacy for Youth Credit Cards Resources 1. Agenda 2. PowerPoint Presentation 3. Lesson 13 Worksheets

THE WISER CHOICE



Economic and Financial Coaching



Partnership for After School Education 120 Broadway, Suite 230 New York, NY 10271 April 6, 2016

Fostering Financial Literacy for Youth: Credit Cards Presenter: Doug Young 10:00 – 10:15

Introductions & Credit Quiz

10:15 – 10:45

Asset Poor and Use of Credit The Five Plastic Money Cards: Good, Bad and Ugly! Activity: It’s Gonna Take Me How Long? www.bankrate.com/calculators/credit-cards/credit-card-payoff.calculator.aspx

11:30 – 12:00

Lesson 13 – Applying for Credit (Activity)

12:00 – 12:15

Break

12:15 – 12:30

What is a Credit report? Activity: www.howmanyofme.com

12:30 – 1:55

What is a Credit Report? www.whatsmyscore.org/estimator Activity: What Affects a Credit Score?

12:55 – 1:00

Evaluations and Certificates

 25 Martine Avenue #706, White Plains, New York 10606 [email protected] 914.715.9969



10 Critical Credit Questions 1) 2) 3) 4) 5) 6) 7) 8) 9) 10)

What is the “Schumer Box?” How long do negative items stay on your credit report? What does “opting-out” mean in banking? What is the average debt of a college graduate? What is the “utilization rate” for credit cards? In banking, what is the “ChexSystem?” Where can you get your credit report for free? How many credit scores are there? Name the three credit bureaus. Most banks accept only one credit score when applying for a loan. Which one is it?

When you hear the word personal finance, what do you think of?

1

But How Do You Make Economics Interesting? • The traditional way economics is taught: http://www.youtube.com/watch?v=dxPVyieptwA

• Can teachers make economics and personal finance more interesting? I think we can:

1. By showing students that economics is everywhere. 2. By demonstrating that personal finance is part of our everyday life: from inception to finality.

Cost of raising a child from birth to age 18 averages over $280,000. The cost of just having that child is: @$18,000 - $28,000 The average cost of a funeral is: $7,000 and $10,000.

What is the basic economic problem?

Scarcity:

Unlimited human wants in a world of limited resources.

2

Setting Financial Goals Oh, Scarcity Tune: Oh, Christmas Tree Oh, scarcity! Oh, scarcity! We can't have all the things we want. Oh, scarcity! Oh, scarcity! We cannot have it all. We really want a lot of stuff. But sometimes there's just not enough. Oh, scarcity! Oh, scarcity! We cannot have it all. http://www.criticalcommons.org/Members/oroark/clips/barenakedladiesmillio n-frame2012.mp4

Wants versus Needs • Glasses, glasses on my head, What monies will I need as I look ahead? • Setting “Financial Goals” – Long term 1) 2) 3) – Mid term 1) 2) 3) – Short term 1) 2) 3) http://www.criticalcommons.org/Members/oroark/clips/billionaire-by-travie-mccoy-featuring-bruno-mars-1

3

The Devil Conspicuous consumption is the spending of money on and the acquiring of luxury goods and services to publicly display economic Shop! Goes the Consumer Tune: Pop Goes the Weasel Consumers want a lot of goods. Consumers want to use them. Mike wants to buy LeBron sneakers, Shop! – Goes the consumer. Consumers want some services. Consumers want to use them. Elizabeth wants to add new apps. Shop! – Goes the consumer.

A New Class: The Asset Poor

An asset-poor household is one in which a sudden halt in income would have serious consequences immediately. Asset poverty is a measure of whether a household can support itself using savings or other available assets for 12 weeks at a poverty-level income. Asset Poverty Rates by Race in the United States African American

Hispanic

Native American

Asian

White

43.2%

39.0%

34.5%

23.1%

16.6%

4

Let’s Start Budgeting! • Let’s find a job http://www.careerinfonet.org/occupations/select_occupation.aspx?next=occ_rep&level=&optstatus=&i d=1,11&nodeid=2&soccode=&stfips=&jobfam=&menumode=

• Gross Income - Taxes = Disposable income http://www.bankrate.com/calculators/tax-planning/1040-form-tax-calculator.aspx

• Disposable income = consumption + saving • Saving = disposable income − consumption

http://www.criticalcommons.org/Members/oroark/clips/cashm.mp4

The Five Plastic Money Cards: The Good, Bad and Ugly

All Cards

Are Not

The Same!

5

Gift Card

Costs: Benefits:

Debit Cards: The Pay Now Card

 Costs:  Benefits:

6

Store Cards

Costs: Benefits:

Pre-Paid Money Cards

Costs:

Benefits:

7

Terminology for Credit Card Users Good, Bad and Ugly •

Triggerer – I racked up over $25,000 in credit card charges as a result of: (divorce, health issues, loss of job).

•

Surfers – I open up card after card, searching for cheaper fees. As a result, I now have 15 cards, all with huge debt, and a very low credit score.

•

Ponzi Schemer – I run up huge amounts of debt on my credit card and then open new accounts to pay off the old debt. I have over $30,000 in credit card debt right now.

•

Revolver – I carry balances, paying off those balances over time, thus "revolving" them.

•

Zombie – I have old credit card debt that is beyond the statute of limitations, so a debt collector cannot collect from me. However, they still harass me and my relatives for payment. So debts don't die, they rise to live on and on. Like zombies.

•

Dead Beat – Credit card companies don’t like me. I charge EVERYTHING and pay off my balance each month. (Rack up those incentive points).

Credit Cards The Cornerstone of the U.S. Economy

Beware of “MAXING OUT” Let’s hear from some credit card victims.

8

Types of Expenses Contributing to Credit Card Debt

The New and Improved Schumer Box How Credit Card Companies Make Their Money: “Let Me Count the Ways!”

9

What’s a Credit Report?

 From age 18 on, agencies collect data about your spending habits.  Monitor your ability to handle risks (i.e. installment loans and revolving charge accounts)  Impacts: amount you can borrow and the interest rates on that loan.  Who Can Access Your Report?  Creditors  Collection agencies  Insurance companies  Employers  Landlords  Many others!!!

www.howmanyofme.com

What is in a Credit Report?  Personal Data  Employment History  Public Records (liens, judgments, secured loans, foreclosures, bankruptcies, etc.)  Collection Accounts (defaults and lateness)  Credit Information (open accounts, date account was opened, payment status)  Inquiries (approved requests and others seeking credit information)

10

How Long Does the Information Remain On A Credit Report? TYPE Suits & Judgments Tax Liens – Paid Tax Liens – Unpaid Charged to Profit & Loss Criminal Record Limitations Other adverse information Late Payments Debt Collections Bankruptcy

LIMITATION 7 years 7 years from payment No limitation 7 years No limitations 7 Years 7 Years 7 Years 10 Years

Improving Your FICO Credit Score

http://www.whatsmyscore.org/estimator/

11

What is a Credit Score?

 A tool created from your credit report which can assess your

financial status, history, and debt repayment record.  Credit rating is determined by three bureaus that all banks, employers, companies you deal with check to see if you are a good risk.  Two most commonly used credit scores are the:  FICO (Fair Isaac Corp.), which ranges from 300 – 850.  Vantage (Experian), scores go from 501 - 990.  There are hundreds of credit scores which are used by mortgage lenders; auto dealerships; and insurance companies for homeowners, life and health policies.

What doesn’t Count in a Score. The scoring model doesn't look at:           

race sex income education marital status job or length of employment at your job whether you've been turned down for credit length of time at your current address whether you own a home or rent information not contained in your credit report age

12

Why is a Credit Score Important?  A poor credit score can affect a person’s ability to:  Obtain credit cards, car loans and mortgages  Receive favorable interest rates and preferred credit limits on cars and credit cards  Qualify for utility and cell phone services with no down payment or substantial security deposit  Rent or lease a house or apartment  Obtain government-sponsored student loans  Obtain private student loans with low rates

 It might also affect:  Your car insurance rate  Life insurance rates  Health insurance premium

13

Distribution of FICO Fair Isaac reports that the American public's credit scores break out along these lines:

Credit score

Percentage

499 and below

2 percent

500-549

5 percent

550-599

8 percent

600-649

12 percent

650-699

15 percent

700-749

18 percent

750-799

27 percent

800 and above

13 percent

14

The key credit score elements Payment history

Repayment behavior (satisfactory, delinquency, derogatory)

Utilization

Percentage of credit amount used/owed on accounts

Balances

Amount of recently reported balances (current and delinquent)

Depth of credit

Length of credit history and types of credit

Recent credit

Number of recently opened credit accounts and credit inquiries

To compare your Vantage Score to a FICO Score:

Available credit

Amount of credit available

Vantage Score of 800 times 0.86 =

Available credit 7% Recent credit 10%

Payment history 32%

Depth of credit 13%

Balances 15%

Utilization 23%

Multiply your Vantage Score by 0.86

FICO Score of 688

CREDIT BUREAU RISK SCORE REASON CODES

EQUIFAX

TRANS UNION

EXPERIAN

Amount owed on accounts is too high

1

1

1

Level of delinquency on accounts

2

2

2

Too few bank revolving accounts

3

3

3

Too many bank or national revolving accounts

4

4

4

Too many accounts with balances

5

5

5

Too many consumer finance company accounts

6

6

6

Account payment history is too new to rate

7

7

7

Too many recent inquiries last 12 months

8

8

8

9

9

9

Proportion of balances to credit limits is too high on bank revolving or other revolving accounts

10

10

10

Amount owed on revolving accounts is too high

11

11

11

Length of time revolving accounts have been established

12

12

12

Time since delinquency is too recent or unknown

13

13

13

Length of time accounts have been established

14

14

14

Lack of recent bank revolving information

15

15

15

Lack of recent revolving account information

16

16

16

No recent non-mortgage balance information

17

17

17

Number of accounts with delinquency

18

18

18

Too few accounts currently paid as agreed

19

19

19

Length of time since derogatory public record or collection is too short

20

20

20

Too many accounts recently opened

15

How Much Will My FICO Score Drop? Current FICO Score

Alex

Blanca

680

780

Score after one of these is added to the credit report One inquiry for a new credit card

675 (5)

775 (5)

A new charge card (additional hit)

665 (15)

760 (20)

Maxing out credit card

660 (20)

745 (35)

A 30-day delinquency

610 (70)

680 (100)

Settling a debt

625 (55)

665 (115)

Foreclosure

585 (95)

630 (150)

Bankruptcy

540 (140)

550 (230)

An $18 million Lesson in Handling Credit Report Errors by Sara Siegel Bernard http://www.nytimes.com/2013/08/03/your-money/credit-scores/credit-bureaus-willing-to-tolerate-errors-experts-say.html?pagewanted=all&_r=0

What Rate Will Your Score Get You? FICO Score

30-year fixed-rate mortgage

36-month new auto loan

15-year home equity loan

Credit Card APR

740

5.0%

6.4%

8.1%

7.3%

720

5.2%

6.4%

8.4%

10.0%

700

5.2%

7.9%

8.9%

15.0%

680

5.4%

9.9%

9.7%

15.0%

660

5.6%

9.9%

11.2% 18.0%

What is APR? APR is the Annual Percentage Rate on a loan or a credit card. It is interest rate that will determine how much you pay in interest each year.

16

How much will you pay? A home theater system for $1,000, when purchased on credit card and each month you pay minimum payment will actually cost

FICO Score

Credit Card APR

You will pay off the balance in about

You will end up paying an interest of

740

7.3%

680

15.0%

660

18.0%

5 years $196 7 years $580 8 years $863

You will end up paying an estimated total of

$1,196 $1,580 $1,863

Instructional Strategies • Have students DEBATE whether gift cards are a good gift using the projected • Have students CALCULATE the cost of paying the minimum payment on a $10,0000 store card debt • Have students EXPLORE “Ask CFPB” for various questions on debit card fees. • Have students use the Federal Reserve credit card tools to COMPARE two different credit card solicitations. • Have students RESEARCH how much money Justin Bieber received to endorse his PrePaid Money Card. • Have students SAVE in their phones a reminder on their 18th birthday that repeats every year to go to annualcreditreport.com and CHECK their credit score.

17

Questions & Answers

www.creditscorequiz.org

18

LESSON

13 Applying for Credit LESSON DESCRIPTION AND BACKGROUND This lesson explains what a credit report is and how to read one. To learn about credit reports, the students play the role of loan officers, reviewing excerpts from the credit reports and credit scores of loan applicants. They evaluate each applicant's credit history and use the information to determine whether to grant the loan requested.

Two 45-minute class periods

MATERIALS • A copy for each student of Exercise 13.1, 13.2, and 13.3 from the Student Workbook.

ADDITIONAL RESOURCES

Lesson 13 correlates with national standards for economics and personal finance as shown in Tables 1-2 in the introductory section of the publication.

To download visuals, find related lessons, correlations to state standards, interactives, and more visit http://fffl.councilforeconed.org/ 9-12/lesson13.

ECONOMIC AND PERSONAL FINANCE CONCEPTS

PROCEDURE

• Credit history • Credit report • Credit score

OBJECTIVES At the end of this lesson, the student will be able to: • Identify the qualities that a lender looks for in a loan applicant. • Describe what a credit report is and how it is used. • Describe the elements of a credit score. • Explain how credit scores affect creditworthiness and the cost of credit. • Explain the factors that improve a credit score. • Identify organizations that maintain consumer credit records.

1. Tell the students that this is a lesson about what it takes to qualify for a loan from a financial institution. Explain that a person can’t simply walk into a bank and say “Hi there. I’d like to have $14,000, please, to buy a new car.” The procedure is more formal than that. It involves an application for credit, and no loan is issued without a favorable evaluation of the application by a loan officer. 2. But what is involved in making an application for a loan? And what goes through the loan officer’s mind when she or he evaluates a loan application? In this lesson, the students will learn about credit reports—the principal tool used by loan officers when they evaluate credit applications. The students will assume the role of loan officer, review excerpts from the credit reports of three loan applicants, and make decisions about whether to approve the loans.

• List the types of information contained in a credit report.

3. To get started, ask the students to imagine that an individual has approached them and asked to borrow a substantial sum of money. What would they want to know about this person before they decided to lend the money? Discuss the responses briefly.

• Use a credit report and score to determine whether to grant a loan.

4. Give each student a copy of Exercise 13.1 from the Student Workbook. Ask the students

• Compare and contrast favorable and unfavorable credit reports.

60

TIME REQUIRED

FINANCIAL FITNESS FOR LIFE: Teacher Guide Grades 9-12 http://fffl.councilforeconed.org/9-12

©Council for Economic Education

THEME 4 | Lesson 13: Applying for Credit

to read the exercise and answer the questions at the end. When the students have finished, go over the questions in class: a. What are the "3 Cs of Credit?" (Character, capacity, collateral.) b. Give examples of each of the 3 Cs of Credit. (Answers will vary. See Exercise 13.1 for several examples of each.) c. What is a credit report? (A record of an individual's credit history.) d. Why should a person care about his or her credit report? (A good credit rating is important if a person wants to borrow money—particularly at a competitive interest rate.) e. Are you allowed to check the accuracy of your credit report? (Yes. The Fair Credit Reporting Act gives you the right to view your credit report.) f. Is there a charge for checking the accuracy of your credit report? (The Fair and Accurate Credit Transactions Act gives you the right to receive one free copy of your credit report annually from each of the three credit-reporting agencies. The Fair Credit Reporting Act allows you to receive a credit report for no charge if you are turned down for credit or are a victim of identity theft.) g. What is a credit score? (Credit scores are summaries of the information in credit reports. The formula for computing credit scores was developed by Fair Isaac Corporation; the scores are commonly referred to as FICO scores. Scores range from 300 to 850. People with lower scores will be more likely to be denied credit or charged higher interest rates.) 5. Give each student a copy of Exercise 13.2 from the Student Workbook and ask the students to use the information found in the credit report to answer the questions. When they have finished, go over the questions in class:

FINANCIAL FITNESS FOR LIFE: Teacher Guide Grades 9-12 http://fffl.councilforeconed.org/9-12

LESSON

13

a. Whose credit report is this? (John Q. Consumer.) b. How many potentially negative items are listed? (Four. Two are from public records and two are from accounts with creditors and others.) c. How many accounts are in good standing? (Three.) d. On page 2, there are two very negative items. What are they? (Dime Savings filed a civil claim against John Q. Consumer; John Q. Consumer filed for bankruptcy, and it was discharged, or granted.) e. Have any of John Q. Consumer's credit cards been lost or stolen? (Yes: The card issued by American Finance Corporation.) f. Does John Q. Consumer have a good credit record with First Credit Union and National Credit Card? What are the reasons for your opinion? (Yes. The status is open—never late.) g. Who requested John Q. Consumer's credit report in 2009? (Credit R Us; World Bank; Fidelity Bank NA.) h. Is John Q. Consumer a homeowner? (Yes.) i. What is the most negative item on this report, and for how many years does that item remain in the credit report? (The bankruptcy. It will remain in the report until 11/2015 or ten years after the bankruptcy was discharged.) j. What is John Q Consumer’s credit score? (550) k. If you were a lender, would you grant John Q. Consumer credit? Why or why not? (Answers will vary.)

CLOSURE Conclude the lesson by placing the students in small groups; ask each group to draw up a list of steps that can be taken to establish or re-establish a good credit rating. Have each group report to the class. Answers include the following: • Pay bills on time.

©Council for Economic Education

61

LESSON

13

THEME 4 | Lesson 13: Applying for Credit

• Borrow only what you need. • Apply for and use only a few credit cards. • Open a savings account and make deposits monthly. • Open a checking account and don't bounce checks. • Report a lost or stolen credit card immediately. • Use collateral to strengthen loan requests. • Avoid bankruptcy. • Stay employed. • Own a home and don't move too often. • Make sure your loans aren't too great as a percentage of your income.

ASSESSMENT 1. Tell the students that they will now play the role of a loan officer. Give each student a copy of Exercise 13.3 from the Student Workbook. Note that Exercise 13.3 presents credit report summaries for each of three individuals who are applying for credit. The students will play the role of the loan officer and check a box that either grants or denies the credit request, based on the information presented. Ask the students to review the three credit applications and explain their decisions to grant or deny credit and the interest rate that is offered. Possible answers include the following: • Janice Brown. (Credit score 450.) She should be denied. Her credit score is low and her credit record demonstrates difficulties paying her bills. She may need to seek a financial counselor. Eighty-seven percent of borrowers with credit scores similar to hers have been delinquent in paying their debts.

credit. He qualifies for a low interest rate of 6.098 percent. • Maria Martinez. (Credit score 620.) She is a candidate for the "not sure" category. Her score indicates that she could have some difficulty managing credit, but her credit record so far seems OK. Nearly one-third of those with scores like hers have had delinquent accounts. She would probably qualify for a higher-interest loan (11.761 percent). If she improves her score she might be able to refinance the car at a lower rate. 2. To underscore the importance of having a good credit score, compare Tito’s cost (in interest payments) for a loan to Maria’s cost, given their respective credit scores: If Tito and Maria both were approved for a $15,000 four-year car loan, how much difference would their credit scores make in what they pay in interest over the life of the loan? (With an interest rate of 6.098 percent over four years, Tito would pay about $1,941 in interest. Maria’s interest rate of 11.761 percent would make it much more costly for her to finance an auto purchase over the same time period. Her total interest cost would be about $3,875, or about twice the interest paid by Tito.)

EXTENSION Invite a bank loan officer to come to your class and outline the steps that are taken when bankers make decisions on loan applications. Arrange with the loan officer to distribute the documents that are actually used in loan applications; ask the loan officer to discuss interest rates that are charged for different sets of customers.

• Tito Sanders. (Credit score 770.) He should be approved. He has an excellent credit score and a very good credit record. He has handled credit responsibly in the past. Only 2 percent of the borrowers with scores similar to his have been unable to successfully manage their past

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©Council for Economic Education

EXERCISE

13.1

THEME 4 | Lesson 13: Applying for Credit

NAME: _________________________________________ CLASS PERIOD: ____________

Reading a Credit Report Your ability to qualify for a loan depends on a credit report. A credit report is a record of an individual’s personal credit history. It is probably a good indicator of the applicant’s character and whether he or she will repay borrowed money as agreed. When someone applies for a loan, the lender will order a credit report to see how well the applicant has managed credit in the past. A credit report will tell, in detail, how much the person has borrowed, from whom, and whether the bills have been paid on time. Credit reports are compiled by credit bureaus, which regularly collect information on millions of consumers. Credit bureaus get information from a variety of sources, including stores, credit card companies, banks, mortgage companies, and medical providers. When you fill out an application for credit, the information on that application is also sent to a credit bureau. What Are Lenders Looking For? Lenders look for certain qualities in loan applicants. These qualities are called the 3 Cs of Credit: capacity, character, and collateral. A discussion of each follows. Capacity: Capacity refers to the loan applicant’s ability to repay the debt in question. The basic question is “Have you been working regularly in an occupation that is likely to provide enough income to support your use of credit?” More particular questions might address the following:  Do you have a steady job?  What is your salary?  How reliable is your income?  Do you have other sources of income?  How many other loan payments do you have?  What are your current debts?  Do you pay alimony or child support?  Can you afford your lifestyle?

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THEME 4 | Lesson 13: Applying for Credit

EXERCISE

13.1

Character: Questions will be asked to determine whether you are honest and reliable—thus likely to pay debts. Here are some examples:  Have you used credit before?  Do you pay your bills on time?  Do you have a good credit report?  Can you provide character references?  How long have you lived at your present address?  How long have you been at your present job? Collateral: Collateral refers to assets that could be sold to pay off your loan in the event that you could not do so. Collateral serves as a type of insurance for the creditor. Questions related to collateral may include the following:  Do you have a checking account?  Do you have a savings account?  Do you own any stocks or bonds?  Do you have any valuable collections or jewelry?  Do you own your own home?  Do you own a car?  Do you own a boat? The Importance of a Good Credit Rating A good rating on a credit report means that, in the past, bills have been paid on time. A poor rating indicates overdue payments or bills that have gone unpaid. It is extremely important to build and maintain a good credit history. A good credit report can often make the difference between getting a loan or being turned down. In addition, potential employers and landlords will often check an applicant’s credit report before making a final decision about offering a job or a renting out an apartment. Credit Reports May Contain Errors Mistakes can and do sometimes occur on credit reports. For example, a credit report may contain information about a different person with the same name as the applicant, or paid accounts may be listed incorrectly as unpaid. The law provides individuals with a means of requesting and reviewing their credit reports and having mistakes corrected. Under the Fair and Accurate Credit Transactions Act you have the right to get a free copy of your credit report from each credit bureau annually. The official site established by the three credit reporting agencies for free reports is

FINANCIAL FITNESS FOR LIFE: Student Workbook Grades 9-12

©Council for Economic Education

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EXERCISE

THEME 4 | Lesson 13: Applying for Credit

13.1

www.annualcreditreport.com. The Fair Credit Reporting Act allows you to receive a free copy of your credit report if you are turned down for credit or are the victim of identity theft. The three largest credit bureaus are:  Equifax  Experian  TransUnion What’s My Score? Credit reporting agencies summarize much of the information in your credit report into one credit score. The formula for computing credit scores was developed by Fair Isaac Corporation; the scores are commonly referred to as FICO scores. The scores range from 300 to 850, with the median score being 723. People with lower scores are more likely to be denied credit or charged higher interest rates. People with scores of 770 or higher will receive the best rates for loans. Scores of 640 or more will qualify applicants for fairly good rates. People with scores of 600 or less will have difficulty getting a loan. These people probably need credit counseling. The following chart shows how lenders use FICO scores to evaluate loan applicants. For example, the chart shows that 8 percent of borrowers had FICO scores of 550 to 599, and approximately half of them either didn’t pay back money they owed or were more than 90 days late in making their payments. In contrast, 27 percent of borrowers have a score of 750 to 799, and only 2 percent of them were delinquent. FICO Scores: Measure Credit Risk How Borrowers Rank

Delinquency Rates by FICO Scores

Up to 499

2% Up to 499

87%

500 to 549

5% 500 to 549

71%

550 to 599

8% 550 to 599

51%

600 to 649

12% 600 to 649

31%

650 to 699

15% 650 to 699

15%

700 to 749

18% 700 to 749

5%

750 to 799

27% 750 to 799

2%

800 +

13% 800 +

1%

Source: Fair Isaac

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THEME 4 | Lesson 13: Applying for Credit

EXERCISE

13.1

Who Uses Credit Scores? Lenders aren’t the only ones who use credit scores. Insurance companies use them in their evaluations of a new client’s risk. A person with a low credit score may not be able to buy insurance, or will be charged a higher premium. Landlords also request credit scores when evaluating new tenants. People who have difficulty paying their bills may not be able to pay their rent on time. Finally, some employers use credit scores when screening new applicants for jobs. Employers seeking to fill jobs which require the handling of cash, or jobs paying salaries over $100,000, are especially likely to request a credit score for the applicant. What Information Is Used to Calculate My Score? • Payment history (35%) The most important part of a credit score is your repayment history. More than a third of your score is based on whether or not you have paid your bills and whether you have paid them on time. Most people are never late in paying their bills. So, if you are ever a late payer, even a few times, it will hurt your score. How late you are (whether it’s 30, 60, or 90 days) makes a difference, too. An account that was late 90 days or never repaid will hurt your score more than one that was late 30 days. • Amounts owed (30%) The second most important factor is the amount of debt you currently owe. This measure is based on your current level of debt compared to your income. It also includes a measure of how much credit you are currently using out of the amount of credit that is available to you. Many lenders will not make loans to individuals who are already spending 25 percent of their gross income to repay debt. They feel that the borrower will not have enough discretionary income to make additional payments, reliably, on a new loan. For example: A person who owes money on school loans, a car loan, a mortgage, and lots of credit card payments, totaling 50 percent of his or her take-home pay, probably wouldn’t be able to handle any more debt. In addition to the actual amount of debt you currently owe, lenders will look at how you are currently using of the credit available to you. If you have two credit cards with a total credit limit of $10,000 and a balance of $5,000 (a ratio of 5,000/10,000 or 50%) you will be more likely to qualify for a loan than someone who has a $1,000 credit limit with a balance of $900 (900/1,000 or a ratio of 90%). • Length of credit history (15%) The length of time that you have had credit affects your credit score. Sometimes people are encouraged to keep old accounts open with no balance just to help their credit score.

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EXERCISE

13.1

THEME 4 | Lesson 13: Applying for Credit

• Types of credit (10%) Lenders like to see a mix of installment loans and credit cards. However, it is much more important to pay all of your bills on time than to have variety in your credit profile. • New credit and inquiries (10%) Each time you apply for credit, the lender will request your credit report. These requests, sometimes called inquiries, temporarily reduce your credit score. Applications for new credit following recent late payments are viewed more negatively because they are seen as a sign that you are trying to borrow to pay current debt rather than to buy a new asset. However, there may be times—when you are shopping for a car, perhaps—when you will apply for credit at several places during a short period of time (say, 30 days) to see where you can get the best offer for a loan. These inquiries are viewed differently; they don’t affect your credit score as negatively as several independent credit applications throughout the year. What can you do to earn a good credit score or improve your score? Pay your bills on time and limit the amount of debt you take on. These two factors account for 65 percent of your credit score! Ways to Establish and Keep a Good Credit History and Improve Your Credit Score There are several steps you can take to establish and maintain a good credit history.  Always pay your bills on time.  Never borrow more than you can comfortably pay back.  Borrow only the amount you need.  Know how much you owe at all times.  Contact lenders immediately if you expect to have a payment problem.  Develop good saving habits so that you can handle financial emergencies without borrowing.  Report lost or stolen credit cards immediately.  Never give your credit card number or other personal information over the phone or on the Internet unless you initiated the transaction.  Open a checking account and a savings account.  Do not apply for too many credit cards. Even if you don’t use them, the credit limits are taken into consideration when you apply for credit.

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THEME 4 | Lesson 13: Applying for Credit

EXERCISE

13.1

Questions: a. What are the "3 Cs of Credit"?

b. Give examples of each of the 3 Cs of Credit.

c. What is a credit report?

d. Why should a person care about his or her credit report?

e. Are you allowed to check the accuracy of your credit report?

f. Is there a charge for checking the accuracy of your credit report?

g. What is a credit score?

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EXERCISE

13.2

THEME 4 | Lesson 13: Applying for Credit

NAME: _________________________________________ CLASS PERIOD: ____________

Evaluating a Credit Report Study the credit report on the following pages and answer the questions below. Questions: a. Whose credit report is this? b. How many potentially negative items are listed? c. How many accounts are in good standing? d. On page 2, there are two very negative items. What are they? ____________________________________ ____________________________________ e. Have any of John Q. Consumer’s credit cards been lost or stolen? f. Does John Q. Consumer have a good credit record with First Credit Union and National Credit Card? What are the reasons for your opinion? g. Who requested John Q. Consumer’s credit report in 2009? ____________________________________

____________________________________

____________________________________ h. Is John Q. Consumer a homeowner? i. What is the most negative item on this report, and for how many years does that item remain in the credit report? j. What is John Q. Consumer’s credit score? k. If you were a lender, would you grant John Q. Consumer credit? Why or why not?

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EXERCISE

THEME 4 | Lesson 13: Applying for Credit

13.2

Credit Report of John Q. Consumer Credit R Us

Prepared for John Q. Consumer

Report date June 01, 2009

Report number 1687771839-0000051088

Page 1 of 7

Personal Credit Report About this report Credit R Us collects and organizes information about you and your credit history from public records, your creditors, and other reliable sources. We make your credit history available to your current and prospective creditors and employers as allowed by law. We do not grant credit or evaluate your credit history. Personal data about you may be made available to companies whose products and services interest you. Important decisions about your creditworthiness are based on the information in this report. You should review it carefully for accuracy.

FINANCIAL FITNESS FOR LIFE: Student Workbook Grades 9-12

Credit R Us P.O. Box 9595 Allen TX 75013-9595 Report number Below is a summary of the information contained in this report. Potentially negative items listed Public records Accounts with creditors and others

2 2

Accounts in good standing

3

Credit Score 550

If you have questions For all questions about this report, please call us at: 1-888-000-0000 M - F 7:30am – 7:00 pm CT To learn more about Credit R Us or for other helpful information, including tips on how to improve your creditworthiness, visit our web site: http://www.creditrus.com

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EXERCISE

THEME 4 | Lesson 13: Applying for Credit

13.2

3 C

Credit R Us

Prepared for John Q. Consumer

Report date June 01, 2009

Report number 1687771839-0000051088

Page 2 of 7

Information affecting your creditworthiness Items listed with dashes before and after the number, for example –1–, may potentially have a negative effect on your future credit extension and are listed first on the report. Credit grantors may carefully review the items listed below when they check your credit history. Please note that the account information connected with some public records, such as bankruptcy, also may appear with your credit accounts listed later in this report.

Your statement At your request, we’ve included the following statement every time your credit report is requested. “My identification has been used without my consent on applications for credit. Please call me at 999.999.9999 before approving credit in my name.”

Important decisions about your creditworthiness are based on the information in this report. You should review it carefully for accuracy. Public record information about you Source/ Identification number

Location number

Date filed/ Date resolved

-1- HOLLY COW DIST CT 305 MAIN STREET HOLLY NJ 08060

B312P7659

3-2005/NA

-2- BROWN TOWN HALL 10 COURT STREET BROWN NJ 02809

Bk443PG14

11-2005/NA

Credit R Us

Responsibility

Claim amount Liability amount

Comments

Joint

$3,765/NA

Status: civil claim judgement filed. Plaintiff: Dime Savings. This item is scheduled to continue on record until 3-2012. This item was verified on 8-2005 and remained unchanged.

Joint

$57,786/NA

Status: chapter 7 bankruptcy discharged. This item is scheduled to continue on record until 11-2015. This item was verified on 8-2005 and remained unchanged.

Prepared for John Q. Consumer

Report date June 01, 2009

Report number 1687771839-0000051088

Page 3 of 7

Credit information about you Source/Account number (except last few digits)

Date opened/ Reported since

Date of status/ Last reported

Type/Terms/ Monthly payments

Responsibility

Credit limit or original amount/ High balance

Recent balance/ Recent payment

Comments

-3- FIDELITY BK NA 300 FIDELITY PLAZA NORTHSHORE NJ 08902 46575000024

6-2002/ 6-2002

12-2004/ 12-2004

Installment/ 10 months/$0

Individual

$4,549/NA

$4,549 as of 12-2004

Status: Charge off. $4,549 written off in 12-2004. This account is scheduled to continue until 12-2011.

-4- B.B. Credit 35 WASHINGTON ST. DEDHAM MA 547631236

10-1998/ 4-2003

4-2006/ 4-2006

Installment/ 80 months/$34

Individual

$8,500/$8,500

$0 as of 4-2006/ $34

Status: Debt reincluded in chapter 7 bankruptcy. $389 written off in 3-2006. Account history: Collection as of 9-2003 thru 6-2004 90 days as of 7-2003 60 days as of 112002, 6-2003. 30 days as of 9-2002, 1-2003 and 2 other times. This account is scheduled to continue on record until 2-2009. This item was verified and updated on 6-2004.

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EXERCISE

THEME 4 | Lesson 13: Applying for Credit

Credit R Us Credit information about you

13.2

Prepared for John Q. Consumer

Report date June 01, 2009

Report number 1687771839-0000051088

Page 4 of 7

continued

Source/Account number (except last few digits)

Date opened/ Reported since

Date of status/ Last reported

Type/Terms/ Monthly payments

5 FIRST CREDIT UNION 748 WASHINGTON LNE LANEVILLE TX 76362 129474 Mortgage: 74848347834

3-2004/ 3-2004

11-2006/ 11-2006

6 AMERICAN FINANCE CORP PO BOX 8633 COLLEY IL 60126 6376001172...

6-2001/ 7-2001

7 NATIONAL CREDIT CARD 100 THE PLAZA LAKEVILLE NJ 08905 420000638...

6-2001/ 6-2001

Credit limit or original amount/ High balance

Recent balance/ Recent payment

Comments

Installment/ 48 Months/$420

$17,856/NA

$0 as of 11-2006/ $420

Status: open/never late.

11-2006/ 11-2006

Revolving/NA $400

$18,251

$0 as of 11-2006

Status: card reported lost or stolen. This account is scheduled to continue on record until 11-2009.

11-2006/ 11-2006

Revolving/NA/ $0

$8,000 $8,569

$0 as of 11-2006

Status: open/never late.

Credit R Us

Responsibility

Joint with JANE CONSUMER

Prepared for John Q. Consumer

Report date June 01, 2009

Report number 1687771839-0000051088

Page 5 of 7

Your use of credit The information listed below provides additional detail about your accounts, showing up to 24 months of balance history, your credit limit, high balance or original loan amount. Not all balance history is reported to Credit R Us, so some of your accounts may not appear. Also, some credit grantors may update the information more than once in the same month. Source/Account number

Date/Balance

6 AMERICAN FINANCE CORP. 6376001172

11-2006/$0 9-2005/$3,451 11-2004/$6,651 12-2003/$9,051

Between 1-2002 and 11-2006 your credit limit was unknown. 7 NATIONAL CREDIT CARD 420000638 Between 6-2001 and 11-2006 your credit limit was $8,000.

10-2006/$4,329 7-2005/$4,251 9-2004/$7,051 11-2003/$9,451

8-2006/$0 5-2005/$4,651 7-2004/$7,451 9-2003/$10,251

5-2006/$0 2-2006/$250 1-2006/$0 12-2005/$2,951 2-2005/$5,451 1-2005/$5,851; 12-2004/$6,251 5-2004/$7,852 3-2004/$8,251 1-2004/$12,651 7-2003/$10,651 5-2003/$11,051

11-2006/$0 9-2006/$542 7-2006/$300 6-2006/$686 4-2006/$1,400 3-2006/$2,500 1-2006/$2,774    12-2005/$599 9-2005/$873 7-2005/$1,413 5-2005/$1,765 4-2005/$2,387 3-2005/$3,400 2-2005/$3,212 1-2005/$4,412 12-2004/$2,453 9-2004/$2,453 10-2004/$1,769 8-2004/$1,200    4-2004/$3,200 2-2004/$4,568 1-2004/$5,582 12-2003/$3,000 10-2003/$3,200 8-2003/$4,500

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EXERCISE

THEME 4 | Lesson 13: Applying for Credit

13.2

       

Credit R Us

Prepared for John Q. Consumer

Report date June 01, 2009

Report number 1687771839-0000051088

Page 6 of 7

Others who have requested your credit history Listed below are all those who have received information from us in the recent past about your credit history. Requests initiated by you You took actions, such as completing a credit application that allowed the following sources to review your information. Please note that the following information is part of your credit history and is included in our reports to others. Source

Date

Comments

ABC MORTGAGE 64 MAPLE ROSEVILLE, MD 02849

10-18-2006

Real estate loan of $214,000 on behalf of State Bank with 30 year repayment terms. This inquiry is scheduled to continue on record until 10-2009.

Credit R Us

Other requests

You may not have initiated the following requests for your credit history, so you may not recognize each source. We offer credit information about you to those with a permissible purpose, for example, to: • other creditors who want to offer you pre-approved credit; • an employer who wishes to extend an offer of employment; • a potential investor in assessing the risk of a current obligation; • Credit R Us Customers Assistance to process a report for you; • your current creditors to monitor your accounts (date listed may affect only the most recent request). We report these requests only to you as a record of activities, and we do not include any of these requests on credit reports to others. Source

Date

CREDIT R US PO BOX 949 ALLEN TX 75013

3-09

WORLD BANK PO BOX 949 ALLEN TX 75013

3-09, 12-08, 9-08, 6-08, 3-08, 12-07, 9-07, 6-07, 3-07

FIDELITY BK NA 300 FIDELITY PLAZA NORTHSHORE NJ 08902

1-09, 7-08, 1-08, 7-07, 1-07

NATIONAL CREDIT REPORT 100 THE PLAZA LANEVILLE NJ 08905

7-07, 2-07

Prepared for John Q. Consumer

Report date June 01, 2009

Report number 1687771839-0000051088

Page 7 of 7

Personal information about you The following information associated with your records has been reported to us by you, your creditors, and other sources. As part of our fraud-prevention program, a notice with additional information may appear in your report. Names John Q. Consumer

       

102

Residences Our records show you currently are a homeowner. The geographical code shown with each address identifies the state, country, census tract, block group, and Metropolitan Statistical Area associated with each address. Address

Type of address

Geographical code

7972 PADDOCK CT LANEVILLE, TX 00000

Single Family

0-192053-3-0

1777 BEVERLY AVE SOMEWHERE, NJ 00000

Single Family

0-224681-25-0

250 GARDEN DRIVE ANYWHERE, NJ 00000

Single Family

0-9004-93-0

FINANCIAL FITNESS FOR LIFE: Student Workbook Grades 9-12

Social Security number 111-11-1111 Year of birth 1964 Driver’s license number CA X123456 Spouse’s name JANE Driver’s license number CA X123456 Notices The first Social Security number listed shows that credit was established before the number was issued.

©Council for Economic Education

EXERCISE

THEME 4 | Lesson 13: Applying for Credit

13.3

NAME: _________________________________________ CLASS PERIOD: ____________

Evaluating Three Loan Applications Listed below are three loan applicants who are interested in buying a new car. Based solely on the information provided and their credit score, determine whether you would approve or decline their loan requests. There is no specific credit score for which lenders would deny a loan automatically, based only on a score. However, the credit score does provide useful information about the creditworthiness of the individual. If you decide to make a loan to the applicant, assign an interest rate appropriate for the applicant’s score. Check your response and then write the reason for your decisions. Interest rates typically assigned to various credit scores are provided on the following page. Status codes given at the end of the reports. JANICE BROWN

Credit Score 450

Company name

Months reviewed

High credit

Terms

Balance

Sears

2

2,016

24

838

Dept. of Educ.

7

1,507

1,507

158

I5

Dept. of Educ.

2

512

512

512

I5

ABC Credit Card

8

3,000

Record of Month

6

______ Approve Why?

29

1,363

______ Not Sure

TITO SANDERS

Status R3

28

______ Decline

Past due

R1 38

O3

______ Interest Rate

Credit Score 770

Company name

Months reviewed

High credit

Terms

Balance

Hometown Bank

24

11,000

60

5,350

I1

ABC Credit Card

6

2,500

36

0

O0

Dept. of Educ.

5

2,000

24

1,380

I1

XYZ Credit Card

12

3,000

24

495

R1

______ Approve Why?

______ Decline

FINANCIAL FITNESS FOR LIFE: Student Workbook Grades 9-12

______ Not Sure

Past due

Status

______ Interest Rate

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EXERCISE

THEME 4 | Lesson 13: Applying for Credit

13.3 MARIA MARTINEZ

Credit Score 620

Company name

Months reviewed

High credit

Terms

Balance

Hometown Bank

13

7,200

48

5,800

I1

ABC Credit Card

7

2,000

24

488

R1

______ Approve Why?

______ Decline

Status Codes Type of account O = Open R = Revolving I = Installment

______ Not Sure

Past due

Status

______ Interest Rate

FICO SCORE

APR

720-850

6.098%

690-719

7.644%

660-689

9.059%

620-659

11.761%

590-619

15.478%

500-589 16.202% Timeliness of payment 0 = Approved, not used 1 = Paid as agreed 2 = 30 days past due 3 = 60 days past due 4 = 90 days past due 5 = 120 days past due 7 = Making regular payments under wage earner plan 8 = Repossession 9 = Seriously delinquent/bad debt (paid or unpaid; charged off account)

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